Banking Sector Reforms

Tighter regulatory framework for NBFCs

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NBFCs and their regulations

Mains level : Not Much

The Reserve Bank of India (RBI) has suggested a tougher regulatory framework for the non-banking finance companies’ (NBFC) sector to prevent the recurrence of any systemic risk to the country’s financial system.

Try this PYQ:

Which of the following can be said to be essentially the parts of Inclusive Governance?

  1. Permitting the Non-Banking Financial Companies to do banking
  2. Establishing effective District Planning Committees in all the districts
  3. Increasing government spending on public health
  4. Strengthening the Mid-day Meal Scheme

Select the correct answer using the codes given below:

(a) 1 and 2 only

(b) 3 and 4 only

(c) 2, 3 and 4 only

(d) 1, 2, 3 and 4

What are NBFCs?

  • Nonbank financial companies (NBFCs) are financial institutions that offer various banking services but do not have a banking license.
  • An NBFC in India is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by a government or local authority, or other marketable securities.
  • A non-banking institution that is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments is also an NBFC.

What is the difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:

  • NBFC cannot accept demand deposits
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
  • The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks

What are the new RBI regulations?

  • The regulatory and supervisory framework of NBFCs will be based on a four-layered structure — the base layer (NBFC-BL), middle layer (NBFC-ML), the upper layer (NBFC-UL), and the top layer.
  • If the framework is visualized as a pyramid, at the bottom of the pyramid will be those where least regulatory intervention is warranted.
  • It can consist of NBFCs currently classified as non-systemically important NBFCs.
  • Moving up, the next layer may comprise NBFCs currently classified as systemically important NBFCs (NBFC-ND-SI), deposit-taking NBFCs (NBFC-D), HFCs, IFCs, IDFs, SPDs, and CICs.
  • The regulatory regime for this layer shall be stricter compared to the base layer.
  • The next layer may consist of NBFCs identified as ‘systemically significant’.
  • This layer will be populated by NBFCs having a large potential of systemic spill-over of risks and the ability to impact financial stability.
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